Evaluation of potential disinvestment strategy in India

Abstract

The Government of India has announced strategic disinvestment of various undertakings in order to achieve the dual objective of meeting fiscal deficit requirements as well as increasing privatisation to ensure control and efficiency. The government has executed disinvestments worth Rs. 3 lakh crores in the last 5 years, and has announced further proceeds from stake sale of Rs. 2,00,000 crores in the budget for FY2020-21. We plan to analyse the current fiscal deficit situation for the Central Government, in the context of Fiscal Responsibility and Budget Management Act, 2003. We further attempt to analyse different sources of funds for the government, and determine the pros and cons for each to decide the best source of funding. A careful study of the gamut of holdings by the Central Government helps us identify the entities/companies with better prospects of disinvestment compared to others. We have based our recommendations based on multiple factors like size of the company, operational efficiency, financial performance and profitability, sufficient demand for the company at the right price and lastly the impact of COVID-19 on the saleability of the companies. Lastly, we identify companies most suitable for disinvestment with a horizon of 3-4 years. We arrive at a fair valuation for the companies through valuation techniques and considering qualitative factors like market sentiment, buyer interest and confidence in management. Further, we aim to provide a guidance on the best suitable strategy for disinvestment of stake in the respective companies.